Should you save 3 or 6 months of income for a rainy day?

TRAN THI MAI HAN - PERSONAL FINANCIAL PLANNING EXPERT AT FIDT - Monday, November 6, 2023 20:17 (GMT+7)

Should you save 3 or 6 months of income for a rainy day? — Determining how much savings is appropriate will depend on the financial situation of the individual or family. Photo: Tra My

Notes when setting up an emergency fund

Savings give each person security and ease in managing personal finances. In life, everything can happen that we cannot foresee. These are unexpected cases where you have to pay hospital bills when you get sick, or your income decreases, or even you lose your job...

An emergency fund will help you avoid borrowing money when times get tough. At the same time, this money will also help you ensure progress to achieve your previously set goals. In addition, when you really need money urgently to pay for something, you can completely use it. This will significantly reduce pressure and stress on personal finances.

Saving money is a good idea, but it's also important to be careful. Situations where you shouldn't use your emergency fund include a weekend getaway on a whim or concert tickets with friends. If you often feel like you can't afford to spend, consider cutting back on your savings a bit. Make sure you don't dip into your emergency fund unless it's really an emergency.

How much money is appropriate to save?

An emergency fund is basically your own personal credit card. Many of us have fallen into a financial spiral of "burning" our pockets, borrowing small amounts to get by... Having a reserve fund available helps you deal with difficult situations, without having to borrow to meet financial needs, thereby reducing financial pressure.

Determining how much is appropriate to save will depend on your personal or family financial situation. You should consider the stability of your job or income, your health, and whether you have many dependents.

If your finances are good, your emergency fund should be at least 3-4 months worth of expenses. If your finances are unstable, your emergency fund should be at least 6 months worth of expenses or even more.

Additionally, if you are paying off a bank loan, the reserve will include the principal and interest payments to the bank each month. In this case, the reserve will include at least 6 months of essential expenses and 6 months of bank payments. If the uncertainty factor is higher, a reserve of 12 months or more of expenses may be needed.

Source